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Linking Activity to Cost: A Critical Role for the Finance Professional

Levi Citrin, JD

The Supreme Court’s decision to uphold the Affordable Care Act, and
the victory by President Obama in the November election, made it all but
certain that targeted reimbursement reductions are on the horizon. The
law created the Independent Payment Advisory Board (IPAB) with a mandate
to drive down healthcare costs. Given that the board’s principal tool
the power to modify payment rates and requirements as the board’s
principal tool, providers can expect both lower payments and decreasing
volumes of high-margin services. At the same time, CMS and commercial
payers are actively exploring new care delivery and payment models
including ACOs, bundled pricing, and pay for performance. To top it all
off, consumer and payer interest in the cost and quality of care is
growing as new transparency requirements mandate the reporting of
outcomes and premiums rise.

All of these demands point to the need for a fundamental
transformation in how we deliver care, refocusing efforts toward “better
care at lower cost.” Providers can anticipate particular scrutiny on
the payments for traditionally high-margin, high-volume services and
need to prepare accordingly. Healthcare delivery organizations must make
the care they deliver more efficient, or risk their financial solvency.
Provider organizations will need to capture and analyze integrated cost
and quality data, structured to provide insight into improvement
opportunities. Success requires a level of clinical and financial data
integration that is new for the industry.

The Changing Role of the Finance Professional in Cost ReductionOver
the years, healthcare organizations have employed numerous
cost-reduction and quality-improvement strategies. Hospitals have merged
to form ever-larger systems, and suppliers have consolidated. Extensive
lean operations programs have been established. Simultaneously, quality
assurance (QA) departments have trained small armies of nurses to sift
through patient records and produce reams of reports for the complex
bureaucracy of “quality improvement” committees. In spite of these
efforts, costs continue rising and have been largely pushed onto the
insurer, while significant gaps in quality remain. However, new payment
and delivery models are poised to begin shifting this risk back to the
providers. Physician decision-making, one of the largest drivers in the
ultimate quality and cost of patient care, will be the focus of
cost-reduction and quality-improvement efforts going forward.

Finance professionals have a critical role to play as hospitals
grapple with these challenges,. The first step for monitoring and
controlling healthcare delivery costs is developing an accurate
understanding of the cost of care delivery. Capturing and analyzing
integrated cost and quality data will be critical to deliver more
efficient, high-quality healthcare. This represents a change in how
financial data has been used from the past, and will require the
development of new capabilities, processes, and roles.

Cost AccountingAs the clear trend toward the
standardization of care accelerates, reducing variation in the cost and
outcomes associated with particular procedures or protocols will be
critical. Medical leadership will be pressed to improve consistency, and
will need to rely on finance professionals for accurate activity-based
cost data that allows them to identify outliers. These leaders will need
a more refined understanding of cost than has historically been
required, and simply looking at numbers rolled up at the department or
even DRG level will be insufficient. Finance leaders will need to be
able to identify outliers at the physician and procedure level, so they
can accurately identify the reasons that treatment decisions vary
and—where appropriate—eliminate unnecessary variation.

Deploying and maintaining a detailed activity-based cost accounting
system is a substantial undertaking, but the wealth of data it can
provide is well worth the investment. Many healthcare systems are
currently investing in costly EHR systems that will do little to
facilitate a better understanding of the real drivers of high healthcare
costs, but by linking activities with their costs, finance leaders will
have the data they need to work with clinical leadership to drive
meaningful change.

Supporting Changes Within a Clinical OrganizationOf
course, having data is only the first step; affecting change within a
clinical organization will require certain interpersonal and influence
skills—from both clinical and financial leadership—that will allow them
to serve as convincing agents for change. As physician leaders try to
drive change, one of the biggest challenges they face will be their own
peers. Historically, physicians have had enormous autonomy and have
operated from an entrepreneurial base, making them nearly impervious to
change. Because they will have to challenge their peers regarding both
the clinical and financial impact of the decisions they make, physician
leaders will need support. They will need finance professionals to
provide them with meaningful, trustworthy, and easy to understand
financial data and analyses.

Monitoring financial results as physician leaders work to standardize
their approach to care will be critical, and it will be up to finance
to provide practicing physicians with insights into the financial and
business implications of their clinical decision-making. Given the
historical silos dividing clinical and financial leadership, this may
prove challenging, but will ultimately lead to greater success for your
cost and quality initiatives.

Providing “better outcomes at lower cost” is well within our reach,
but this outcome could remain elusive if finance professionals do not
embrace their critical role, by linking activities with costs to manage
unnecessary variability. Managing this variability will also require
finance professionals to develop new capabilities and processes for
engaging clinical leadership and supporting changes in clinical
practice. The return—truly improved healthcare cost and quality—will be
well worth the effort.

The Supreme Court’s decision to uphold the Affordable Care Act, and
the victory by President Obama in the November election, made it all but
certain that targeted reimbursement reductions are on the horizon. The
law created the Independent Payment Advisory Board (IPAB) with a mandate
to drive down healthcare costs. Given that the board’s principal tool
the power to modify payment rates and requirements as the board’s
principal tool, providers can expect both lower payments and decreasing
volumes of high-margin services. At the same time, CMS and commercial
payers are actively exploring new care delivery and payment models
including ACOs, bundled pricing, and pay for performance. To top it all
off, consumer and payer interest in the cost and quality of care is
growing as new transparency requirements mandate the reporting of
outcomes and premiums rise.

All of these demands point to the need for a fundamental
transformation in how we deliver care, refocusing efforts toward “better
care at lower cost.” Providers can anticipate particular scrutiny on
the payments for traditionally high-margin, high-volume services and
need to prepare accordingly. Healthcare delivery organizations must make
the care they deliver more efficient, or risk their financial solvency.
Provider organizations will need to capture and analyze integrated cost
and quality data, structured to provide insight into improvement
opportunities. Success requires a level of clinical and financial data
integration that is new for the industry.

The Changing Role of the Finance Professional in Cost ReductionOver
the years, healthcare organizations have employed numerous
cost-reduction and quality-improvement strategies. Hospitals have merged
to form ever-larger systems, and suppliers have consolidated. Extensive
lean operations programs have been established. Simultaneously, quality
assurance (QA) departments have trained small armies of nurses to sift
through patient records and produce reams of reports for the complex
bureaucracy of “quality improvement” committees. In spite of these
efforts, costs continue rising and have been largely pushed onto the
insurer, while significant gaps in quality remain. However, new payment
and delivery models are poised to begin shifting this risk back to the
providers. Physician decision-making, one of the largest drivers in the
ultimate quality and cost of patient care, will be the focus of
cost-reduction and quality-improvement efforts going forward.

Finance professionals have a critical role to play as hospitals
grapple with these challenges,. The first step for monitoring and
controlling healthcare delivery costs is developing an accurate
understanding of the cost of care delivery. Capturing and analyzing
integrated cost and quality data will be critical to deliver more
efficient, high-quality healthcare. This represents a change in how
financial data has been used from the past, and will require the
development of new capabilities, processes, and roles.

Cost AccountingAs the clear trend toward the
standardization of care accelerates, reducing variation in the cost and
outcomes associated with particular procedures or protocols will be
critical. Medical leadership will be pressed to improve consistency, and
will need to rely on finance professionals for accurate activity-based
cost data that allows them to identify outliers. These leaders will need
a more refined understanding of cost than has historically been
required, and simply looking at numbers rolled up at the department or
even DRG level will be insufficient. Finance leaders will need to be
able to identify outliers at the physician and procedure level, so they
can accurately identify the reasons that treatment decisions vary
and—where appropriate—eliminate unnecessary variation.

Deploying and maintaining a detailed activity-based cost accounting
system is a substantial undertaking, but the wealth of data it can
provide is well worth the investment. Many healthcare systems are
currently investing in costly EHR systems that will do little to
facilitate a better understanding of the real drivers of high healthcare
costs, but by linking activities with their costs, finance leaders will
have the data they need to work with clinical leadership to drive
meaningful change.

Supporting Changes Within a Clinical OrganizationOf
course, having data is only the first step; affecting change within a
clinical organization will require certain interpersonal and influence
skills—from both clinical and financial leadership—that will allow them
to serve as convincing agents for change. As physician leaders try to
drive change, one of the biggest challenges they face will be their own
peers. Historically, physicians have had enormous autonomy and have
operated from an entrepreneurial base, making them nearly impervious to
change. Because they will have to challenge their peers regarding both
the clinical and financial impact of the decisions they make, physician
leaders will need support. They will need finance professionals to
provide them with meaningful, trustworthy, and easy to understand
financial data and analyses.

Monitoring financial results as physician leaders work to standardize
their approach to care will be critical, and it will be up to finance
to provide practicing physicians with insights into the financial and
business implications of their clinical decision-making. Given the
historical silos dividing clinical and financial leadership, this may
prove challenging, but will ultimately lead to greater success for your
cost and quality initiatives.

Providing “better outcomes at lower cost” is well within our reach,
but this outcome could remain elusive if finance professionals do not
embrace their critical role, by linking activities with costs to manage
unnecessary variability. Managing this variability will also require
finance professionals to develop new capabilities and processes for
engaging clinical leadership and supporting changes in clinical
practice. The return—truly improved healthcare cost and quality—will be
well worth the effort.

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